REFORMING INSURANCE LAW: - Law Commission

which could be applied consistently by the courts. It deliberated on whether the objective test in s
21(1)(b) imposed too high a burden on the assured and whether the original view of the ALRC
opting for a substantially subjective test would be preferable. Its conclusion was that s 21(1)(b)
imposed an undue burden on consumer assureds but that the law worked satisfactorily in the
context of commercial insurance. Its recommendation 75 was that the test should remain the same
but that it should be applied by reference to considerations such as the nature and extent of the
cover provided by the contract of insurance, the class of persons who would ordinarily be
expected to apply for cover of that type and the circumstances in which the contract of insurance
is entered into including the nature and extent of any questions asked by the insurer. The
Treasury agreed with this conclusion and the proposed new version of s 21(1)(b), set out in the
Insurance Contracts Amendments Bill 2007 lays down a non-exhaustive list of factors to which
the court is to have regard when determining whether a reasonable person in the circumstances
could be expected to know a matter was relevant to the decision of the insurer whether to enter
the contract of insurance. The revised s 21(1) would require the assured to disclose every matter
known to him, being a matter:
(a) the insured knows to be a matter relevant to the decision of the insurer whether to
accept the risk and, if so, on what terms, or
(b) a reasonable person in the circumstances could be expected to know to be a
matter so relevant, having regard to factors including, but not limited to:
(i) the nature and extent of the insurance cover to be provided under the
relevant contract of insurance; and
(ii) the class of persons for whom that kind of insurance cover is provided in
the ordinary course of the insurer’s business; and
(iii) the circumstances in which the relevant contract of insurance is entered
into, including the nature and extent of any questions asked by the insurer.
In accepting the recommendations of Treasury Review II, the Treasury specifically rejected the
alternative possibility that the duty of disclosure should be abolished entirely: the evidence was
that the duty remained important in the commercial insurance and life markets. As far as UK
reform is concerned, clarification on which test is to be adopted would be necessary.
4.9 The ALRC’s recommendations in its 1991 report on marine insurance are at variance with
this approach. The ALRC was persuaded that the 1984 Act was primarily aimed at consumers 76
and has suggested that in the commercial context of marine insurance the “prudent insurer” test
should be retained over the prudent assured test. Accordingly, under its recommendations, a fact
has to be disclosed by the assured only if he knew or ought to have known that it was material,
that term being defined as it is presently, namely “Every circumstance is material which would
influence the judgment of a prudent insurer in fixing the premium, or determining whether it will
take the risk.” It may here be pointed out that the prudent assured test is self-policing, in that a
know of the relevance of the fact?” Cf Delphin v Lumley General Insurance Ltd (1989) 5 ANZ Insurance Cases 60-
941. The point was left open in GIO General Limited v Wallace [2001] NSWCA 299.
75 Recommendation 4.1.
76 It has to be said that this does not appear from the 1984 Act itself, although the Regulations made under it do, for
specific purposes, treat certain forms of policy which are primarily non-commercial differently.
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